A Made-in-China Financial Crisis?
Since the 2008 global financial crisis, the Chinese financial system has grown to become systemically important. Yet it is not clear that the international financial safety net has the resources to protect the world from the associated risks.
LONDON – As the International Monetary Fund and the World Bank prepare for their annual meeting next week, all eyes are on Evergrande, China’s second-largest property developer, which apparently cannot repay about $300 billion it currently owes to banks, bondholders, employees, and suppliers. With the property giant teetering on the edge of bankruptcy, the world is being forced to contemplate a scenario it had never seriously considered: a made-in-China financial crisis.
Observers have been quick to draw parallels between the Evergrande debacle and past crises. Some compare it to the 2008 crash of the US investment bank Lehman Brothers, which triggered a massive banking and financial crisis. Others recall the near-collapse of the hedge fund Long-Term Capital Management in 1998, which was staved off only by a bailout from the US Federal Reserve to protect financial markets. Still others invoke the collapse of Japan’s real-estate bubble in the 1990s.
In all of these cases, the combination of excessive leverage and overvalued assets triggered instability. But none really offers much insight into the situation at Evergrande, owing to the peculiarities of China’s banking and financial system, which is driven by policy, not markets.